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The table below shows an example of four investors who start with $100K: A, B, C and D.
A holds a passive index fund for 10 years that returns 9%. B and C do the same, but their funds earn 10 and 11% respectively.
D earns 11% per year, but actively trades at least once per year.
We assume D loses no money to market spread and pays no fees – his only penalty are
mandatory short-term capital gains taxes
at his normal tax rate of 30%. The others pay the 15% long-term capital gains when they cash out, after 10 years.
After all four cashout and pay taxes, they are left with the amount shown in the last row.
As you can see D ends up with 18% less that C! You may be surprised to learn that D even nets significantly less than A, despite earning the much better annual return (before taxes).
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